Sweden during the Economic Crisis of 2008

In 2008 Sweden was not an exception and in the 3rd quarter of the year it stumbled into the Great Recession. During 2008 Swedish GDP growth rate dropped to -0.6%, comparing to 3.3% growth in 2007 [ CITATION Eur121 \l 1033 ]. This was led by increasing unemployment to quite high 8.3% in 2009. (Appendix 1) The economy was hit severely by the weak international demand for Swedish products, exports in 2009 declined by 16.7% , which is huge change for one year. (Appendix 2)

Decrease in foreign demand leads to very unpleasant consequences, especially if a country is highly dependent on foreign trade, like Sweden, where exports make about 50% of GDP [ CITATION The12 \l 1033 ]. Decrease in foreign demand occurred due to the global economic downturn which affected Sweden’s trading partners and thus Sweden.

During the next year, 2009 Swedish economy contracted by 5%, which more than average of European union [ CITATION Eur121 \l 1033 ]. However, in 2010 economy rebounded and grew by 6.1% comparing to previous year. It means that Sweden grew more than the United States and even more than any other European developed nation.

How Swedes did manage to do it? The most important thing is that they have learned a lot during the financial crisis in the 1990s and applied this knowledge to solve the crisis in 2008-2009. Firstly, the nation set a goal to target 1% government budget surplus every year, in order to have more fiscal flexibility during the recessions [ CITATION Cal12 \l 1033 ]. Thus when Sweden was hit by recession it had the budget surplus [ CITATION Eur12 \l 1033 ], which allowed satisfying the demand for increased transfer payments that arose because of unemployment [ CITATION Eur122 \l 1033 ]. In other words, budget surplus let the automatic stabilizers, especially transfer payments, work.

Secondly, Central Bank of Sweden reduced its key interest rate to 2.75% in 2008 and 0.75% next year [ CITATION Rik122 \l 1033 ]. Such decreases encouraged private banks to lend money to one another and more importantly it encouraged households to spend more, because when interest rates became low, cost of borrowing decreased, and thus people were eager to borrow even during the recession.

In 2010 Sweden’s GDP growth rate reached 6.1%, amazing increase, comparing to -5% in 2009. The economy experienced unbelievable return; some even refer to Sweden as the ‘rock star’ of the recovery. Swedish government made a very smart move, they applied the lessons they have learnt in the 1990s to resolve recent financial crisis.

Comparison of two crises

We can compare both the crisis of ‘90s and 2008-2009 Great Recession in Sweden to see if the country managed to use its lessons and experience from the earliest crisis to overcome the latest. Both recessions had similar features and characteristics: a slowdown in foreign demand, a burst of a real estate bubble, negative economic growth, unemployment. However, the first one was more local and was partly created because of Swedish government’s imprudent policy years before. It hit the economy real hard, growth was negative for three consecutive years, and budget deficit reached 12%. The second crisis came mostly from global economic slowdown. Swedish exports suffered dramatically, the GDP growth rate fell of the cliff to -5.33% in 2009. However, the next year, 2010 it skyrocketed to +5.54%. Ten percent change in one year was an outstanding recovery, which suggests that Swedes had really learnt from the 90’s and taken steps not only to recover from the first crisis, but also to prevent it from happening again. The use of unique economic policies, known as the “Swedish Model” justified itself. In contrast to the rest of the world, or at least a big part of it, for the Nordic country the crisis of ‘90s was much more devastating and painful than the latest recession.